Excel Online Structured Activity: WACC Estimation

Excel Online Structured Activity: WACC Estimation

On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $10 million in new projects. The firm's present market value capital structure, shown below, is considered to be optimal. Assume that there is no short-term debt.

Debt	$30,000,000
Common equity	30,000,000
Total capital	$60,000,000

New bonds will have an 7% coupon rate, and they will be sold at par. Common stock is currently selling at $30 a share. The stockholders' required rate of return is estimated to be 12%, consisting of a dividend yield of 4% and an expected constant growth rate of 8%. (The next expected dividend is $1.20, so $1.20/$30 = 4%.) The marginal corporate tax rate is 35%.

The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below.

Open spreadsheet

1. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Enter your answer in dollars. For example, $1.2 million should be entered as $1200000. Round your answer to the nearest dollar. Do not round intermediate calculations.

   $

2. Assuming there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity, what is its WACC? Round your answer to two decimal places. Do not round intermediate calculations.

   %

3. Suppose now that there is not enough internal cash flow and the firm must issue new shares of stock. Qualitatively speaking, what will happen to the WACC?

   _____IIIIIIIVV

   I. r_s and the WACC will not be affected by flotation costs of new equity. II. r_s and the WACC will increase due to the flotation costs of new equity. III. r_s and the WACC will decrease due to the flotation costs of new equity. IV. r_s will increase and the WACC will decrease due to the flotation costs of new equity. V. r_s will decrease and the WACC will increase due to the flotation costs of new equity.

Excel Online Structured Activity: WACC Estimation On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $10 million in new projects. The firm's present market value capital structure, shown below, is considered to be optimal. Assume that there is no short-tenm debt. Debt Common equity Total capital New bonds will have an 796 coupon rate, and they will be sold at par. Common stockis currently selling at 30 a share. The sto ho ders equired rate of etu s estimated to be 12%, con sting f a d vide d ied 49 and an expected constant ro th rateof 8%. (The next expected dividend is $1.20, so $1.20/$30-49.) The marginal corporate tax rate is 3 %. The data has been collected in the Microsaft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below 30,000,000 $60,000.000 Open spreadsheet a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Enter your answer in dollars. For axample, $1.2 milion shauld be enterad as$1200000. Round your answer to the nearest dollar. Do not intermedia te calculations b. Assuming there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity, what is its WACC? Round your answer to two decimal places. Do not round intermediate calculations. 96 C. Suppose now that there is not enough internal cash flow and the firm must issue new shares of stock. Qualitatvely speaking, what will happen to the WACC? I. r and the WACC will not be affected by flotation costs of new equity. II. r, and the WWACC wil increase due to the flotation casts af new equity III. r, and the WACC will decrease due to the flotation costs of new equity IV. r, will increase and the WACC will decrease due to the flotation costs of new equity. V. " will decrease and the WACC will increase due to the flotation costs of nor equity. WACC Equation Market value of debt Market value of common $30,000,000 30,000,000 $60,000,000 Total market value New proiect investment $10,000,000 Coupon rate of of par value bonds Price of common stock Required return of common stock, r Dividend yield, D1/P Constant growth rate, g Tax rate 7.00% $30.00 12.00% 4 .00% 8.00% 35.00% Formulas Amount of new investment financed with common equity WACC, assuming no new #N/A common equity Excel Online Structured Activity: WACC Estimation On January 1, the total market value of the Tysseland Company was $60 million. During the year, the company plans to raise and invest $10 million in new projects. The firm's present market value capital structure, shown below, is considered to be optimal. Assume that there is no short-tenm debt. Debt Common equity Total capital New bonds will have an 796 coupon rate, and they will be sold at par. Common stockis currently selling at 30 a share. The sto ho ders equired rate of etu s estimated to be 12%, con sting f a d vide d ied 49 and an expected constant ro th rateof 8%. (The next expected dividend is $1.20, so $1.20/$30-49.) The marginal corporate tax rate is 3 %. The data has been collected in the Microsaft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below 30,000,000 $60,000.000 Open spreadsheet a. In order to maintain the present capital structure, how much of the new investment must be financed by common equity? Enter your answer in dollars. For axample, $1.2 milion shauld be enterad as$1200000. Round your answer to the nearest dollar. Do not intermedia te calculations b. Assuming there is sufficient cash flow such that Tysseland can maintain its target capital structure without issuing additional shares of equity, what is its WACC? Round your answer to two decimal places. Do not round intermediate calculations. 96 C. Suppose now that there is not enough internal cash flow and the firm must issue new shares of stock. Qualitatvely speaking, what will happen to the WACC? I. r and the WACC will not be affected by flotation costs of new equity. II. r, and the WWACC wil increase due to the flotation casts af new equity III. r, and the WACC will decrease due to the flotation costs of new equity IV. r, will increase and the WACC will decrease due to the flotation costs of new equity. V. " will decrease and the WACC will increase due to the flotation costs of nor equity. WACC Equation Market value of debt Market value of common $30,000,000 30,000,000 $60,000,000 Total market value New proiect investment $10,000,000 Coupon rate of of par value bonds Price of common stock Required return of common stock, r Dividend yield, D1/P Constant growth rate, g Tax rate 7.00% $30.00 12.00% 4 .00% 8.00% 35.00% Formulas Amount of new investment financed with common equity WACC, assuming no new #N/A common equity